Friday January 29, 2021 - 12:49:10 GMT
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Trade to Win: Trade Using Directional Risk
I posted this article last year and have updated it as I feel strongly that identifying the directional risk make the difference between being a winning and losing trader. It can also, at times, protect against a headline news reaction.
As I have said many times identifying the strong side to trade is more than half the battle to become a successful trader. This can be accomplished by trading with the directional risk as I will explain below. Note, how to put what I am going to show you into practice in real-time trading is fully explained in the AT Ladder Strategy guide.
What do I mean by the strong side?
Simply put, the strong side is the one least likely to see key stops run against your position. On the other hand, the weak side is the one most vulnerable to see key stops run against your position.
What are key stops?
Key stops are levels, which if broken, trigger stops that run the risk of the market cascading like a rolling river in the same direction looking for more stops to run. This is why I call it the weak side to trade.
What is Directional Risk?
Another way to look at the strong side is trading with directional risk. What this means is identifying what side is most at risk as outlined above and positioning to trade in that direction. So, if the downside is seen most at risk of seeing stops run, then look to trade from the short side. If the upside is seen most at risk of seeing stops run, then look to trade from the long side.
This is why you see traders look to “ buy on dips” or “ sell on blips” because they see a low risk of follow-through against their trade. One reason is there is a lack of key stops to run in that direction. In other words, the directional risk is either seen on the downside (sell on blips) or on the upside (buy on dips),
Fickle forex market
Anyone who has traded in the forex market knows it is dynamic and rarely moves in a straight line. In other words, depending on the time frame, the forex market tends to be fickle and quick to reverse. This means you need to be aware of the directional risk so you can:
1) Avoid trading on the wrong (weak side) or the old episode when the directional risk has changed.
2) Take advantage of a change in directional risk by looking to trade on the "new" strong side.
What the pros are saying
This is from a professional trader and member of Global-View.com
As an institutional trader, we care about averages, not precision. Add in the fact that when we buy (or sell) we are a directional trader over multi-time frames...
How to use Directional Risk to your trading
Sign up for the Amazing Trader (includes the AT Ladder Strategu Guide)
Sign up for the AT Ladder Strategy (includes 2 months Amazing Trader access)
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